Why Haven’t Economic Reforms Raised Macroeconomic Productivity in New Zealand?

I provide an economic model with endogenous movements in TFP as a tool for understanding a rationale behind the productivity decline in New Zealand. Cohort quality, measured by a country's human capital distribution determines opportunities for growth. Vintages of human skills are subject to network effects. These network effects, while important for productivity, have the side effect of introducing incentives for 'rent-seeking' behavior. Innovative activities generate a positive externality to other innovators, while rent-seeking activities generate a negative externality and discourage innovation. I calibrate the model to match a set of key observations on output fluctuations in New Zealand. Numerical simulations of the calibrated model reveal that the reforms did improve efficiency by creating incentives for the skilled population to allocate a greater proportion of their resources to innovative activities. Those activities, however, brought a skill-biased technological change that raised the basic skill requirement. Facing resource constraints due to an implicit adverse selection bias in the market against updating skill a large number of adults in New Zealand have failed to keep up with the growing basic skill requirements and, therefore, decided to switch from innovating to supplying labour. The resulting shrinkage of innovators reduced competition for the high-skill agents and their incentives reverted from innovating to exploiting old institutions to extract economic resources of others, or equivalently, to rent seeking.